The cost of capital is sometimes referred to as the hurdle or discount rate.
A payment to an employee in settlement of salaries payable decreases an asset and
decreases a liability.
Borrowing money from the bank is an example of an asset source transaction.
Capital investment decisions involve investments in current assets.
The four financial statements prepared by a business bear no relationship to each other.
Jenkins Company’s current ratio is higher than the average for its industry, while its
quick ratio is below the industry average. One possible interpretation for these results is
that Jenkins carries less inventory than most companies in its industry.
In a market, a company that manufactures cars would be referred to as a conversion
agent.
For a manufacturing company, both direct labor costs and indirect labor costs are
classified as product costs.
Indicate whether each of the following statements about financial statement analysis is
true or false.
1> Vertical analysis of a company’s balance sheet is useful in assessing its liquidity.
2> Common size financial statements are a form of vertical analysis, but the common
size statements for two or more years may usefully be compared.
3> Vertical analysis of a balance sheet involves converting each component to a
percentage of stockholders’ equity.
4> Small percentage changes resulting from vertical analysis may still represent large
dollar amounts; therefore, changes in both absolute dollar amounts and percentages
should be examined.
5> A common size income statement is prepared by converting each component to a
percentage of net income.
Retained earnings reduces a company’s commitment to use its assets for the benefit of
its stockholders.
Indicate whether each of the following statements about financial statement analysis is
true or false.
1> Having too little inventory can hurt a company’s profitability because of lost sales.
2> Having too much inventory can hurt a company’s profitability because of excess
costs.
3> Generally, a lower inventory turnover indicates that merchandise is being handled
more efficiently.
4> Average days to sell inventory is the number of times, on average, that inventory is
replaced during the year.
5> Values for the inventory turnover ratio vary widely among different industries.
Indicate whether each of the following statements about financial statement analysis is
true or false.
1> Solvency ratios measure a company’s short-term debt paying ability and its financial
structure.
2> A company with a high debt to assets ratio probably would be considered to have a
high level of financial risk.
3> The debt to equity ratio and debt to assets ratio are two ways to measure the same
relationship.
4> From the point of view of stockholders, a decline in the debt to equity ratio is always
good news.
5> The lower the debt to equity ratio, the higher a company’s financial leverage.
Which of the following is an asset use transaction?
A.Purchased machine for cash.
B.Recorded supplies expense at the end of the period.
C.Invested cash in an interest earning account.
D.Accrued salary expense.
The cost of capital is called all of the following except:
A.cutoff rate.
B.discount rate.
C.hurdle rate.
D.All of these are terms for the cost of capital.
“GAAP” stands for
A.Government Authorized Accounting Procedures.
B.Generally Applied Accounting Procedures.
C.Generally Accepted Accounting Principles.
D.Generally Authorized Auditing Principles.
The following events are for Leisure Travel Services for the year 2013, the first year of
operations. Assume that all transactions involve the receipt or payment of cash.
1) The business acquired $40,000 from stock issued to owners.
2) Creditors loaned the company $17,500.
3) The company provided services to its customers and received $55,400.
4) The company paid expenses amounting to $43,250.
5) The company purchased land for $29,000.
6) The company paid a dividend of $5,000 to its owners.
Required:
a) Show the effects of the above transactions on the accounting equation (use
appropriate element and account headings). For those events that affect retained
earnings, indicate in a separate column the appropriate temporary account.
b) Prepare an income statement and balance sheet for the year 2013.
The year-end financial statements of Greenway Company contained the following
elements and corresponding amounts: Assets = $20,000; Liabilities = ?; Common Stock
= $5,000; Revenue = $11,000; Dividends = $750; Beginning Retained Earnings =
$3,750; Ending Retained Earnings = $7,000.
Based on this information, the amount of expenses on Greenway’s income statement
was
A.$7,000.
B.$7,750.
C.$14,000.
D.$3,250.
Earning revenue on account would be classified as a/an:
A.claims exchange transaction.
B.asset source transaction.
C.asset use transaction.
D.asset exchange transaction.
On January 1, 2013, Lamb and Mona LLP admitted Noris to a 20% interest in net assets
for an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had
net assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona.
After the admission of Noris, the partnership contract included the following
provisions:
– Salary of $40,000 a year to Noris.
– Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20%.
– During the fiscal year ended December 31, 2013, the partnership had income of
$90,000 prior to recognition of salary to Noris.
Record the journal entry for the admission of Noris. Goodwill is not to be recorded.
Which type of accounting information is intended to satisfy the needs of external users
of accounting information?
A.Cost accounting
B.Financial accounting
C.Tax accounting
D.Managerial accounting
Kerwin Company is considering purchase of equipment that costs $50,000. If the useful
life is expected to be 5 years and Crown’s required rate of return is 12%, what is the
minimum annual cash inflow that the equipment must offer for the investment to be
acceptable? (Do not round your PV factors and intermediate calculations. Round your
final answer to the nearest dollar.)
A.$8,929
B.$13,870
C.$12,076
D.$17,623
The purpose of common size financial statements is to:
A.compare the amount of common stock to other types of stock.
B.make comparisons between firms of different sizes.
C.make comparisons between different time periods for one company.
D.either make comparisons between firms of different sizes or make comparisons
between different time periods for one company.
An investment that costs $40,000 will produce annual cash flows of $12,000 for a
period of 4 years. Given a desired rate of return of 10%, the investment will generate a
(Do not round your PV factors and intermediate calculations. Round your answer to
nearest whole dollar):
A.positive net present value of $38,038.
B.positive net present value of $1,962.
C.negative net present value of $38,038.
D.negative net present value of $1,962.
Assuming a company’s inventory increased during the period, which of the following
misclassifications may increase net income?
A.Recording administrative salaries as a product cost
B.Recording depreciation on production equipment as an expense
C.Expensing raw material costs instead of including them in inventory
D.Recording depreciation on production equipment as an expense and Expensing raw
material costs instead of including them in inventory
The partners of Apple, Bere, and Carroll LLP share net income and losses in a 5:3:2
ratio, respectively. The capital account balances on January 1, 2013, were as follows:
The carrying amounts of the assets and liabilities of the partnership are the same as their
current fair values. Dorr will be admitted to the partnership with a 20% capital interest
and a 20% share of net income and losses in exchange for a cash investment. The
amount of cash that Dorr should invest in the partnership is:
A.$25,000.
B.$30,000.
C.$37,500.
D.$75,000.
E.$90,000.
A company sells a building to a bank in 2013 at a gain of $100,000 and immediately
leases the building back for period of five years. The lease is accounted for as an
operating lease. The building was originally purchased for $200,000 and currently had a
book value of $50,000 at the date of the sale.
What amount should be recognized as a gain in 2013 using IFRS?
A.$20,000.
B.$50,000.
C.$100,000.
D.$150,000.
E.$200,000.
Steuben Company produces dog houses. During 2013, Steuben Company incurred the
following costs:
Wages paid to factory machine operators in producing the dog houses should be
categorized as:
A.a product cost and recorded in the inventory account
B.a period cost and recorded on the income statement
C.a product cost and recorded on the income statement
D.a period cost and recorded in the inventory account
Which of the following is not a security as defined by the SEC?
A.Accounts receivable.
B.Notes receivable.
C.Treasury stock.
D.Debenture.
E. Investment contract.
Mineola Company paid $30,000 cash to purchase land. As a result of this business
event,
A.Total equity was not affected.
B.The net cash flow from investing activities decreased.
C.Total assets were not affected.
D.All of these are correct.
Nguyen Company has an opportunity to purchase an asset that will cost the company
$36,000. The asset is expected to add $12,000 per year to the company’s net income.
Assuming the asset has a five-year useful life and zero salvage value, the unadjusted
rate of return based on the average investment will be:
A.60%.
B.33%.
C.15%.
D.none of these answers is correct.
Which of the following costs would be classified as a direct cost for a company that
produces motorcycles?
A.Rent of manufacturing facility that produces motorcycles
B.Seats used in the motorcycles
C.Wages of motorcycle assembly workers
D.Both Seats used in the motorcycles and Wages of motorcycle assembly workers are
correct.
Assume the partnership of Dean, Hardin, and Roth has been in existence for a number
of years. Dean decides to withdraw from the partnership when the partners’ capital
balances are as follows:
An appraisal of the business and its property estimates the fair value to be $100,000.
Dean has agreed to receive $64,000 in exchange for his partnership interest.
Prepare the journal entry for the payment to Dean in the dissolution of his partnership
interest, assuming the bonus method is to be applied.
The Ping Corporation was started on January 1, 2013, with the issuance of $20,000 of
stock. During 2013, the company provided $30,000 of services on account and
collected $18,000 of that amount. Ping incurred $23,000 of expenses, and paid $20,000
of that amount during 2013. On December 31, 2013, Ping paid investors a $800 cash
dividend and accrued $2,000 of salary expense.
Required:
1) What is the net income for year ending December 31, 2013?
2) Prepare Ping Corporation’s Statement of Cash Flows for the year ended December
31, 2013.
3) What is the balance in Ping’s retained earnings account after closing entries are made
on December 31, 2013?
The Jordan Company, estimating its sales to be 20,000 units for the upcoming period,
prepared the following static budget:
The owner of the business is not so sure about the 20,000 unit sales volume and has
requested additional budgets.
Describe the differences between the liquidity ratios, solvency ratios and profitability
ratios. Identify examples of each type of ratio as well.
Why are adjusting entries necessary in an accrual accounting system? What are some
common examples?